Component Procurement Strategy in TRIAD Competitive Supply Chains

In complex supply chains today, intermediary organizations such as contract manufacturers and group purchasing organizations (GPO) are prevalent, and firms like Original Equipment Manufacturers (OEMs) confer their purchasing and procurement processes to such organizations. Because of their potential impact on the efficiency of supply chain, it is important to investigate the role of intermediaries in competitive supply chains. A prominent issue regarding intermediaries is whether an OEM can control components procurement or confer this task to intermediary organizations. This article studies the equilibrium point between two competing OEMs for procurement strategies for substitutable products. Each one of the OEMs may either procure directly its needs from the component supplier or devolve procurement to a contract manufacturer. We analyze OEMs’ procurement Stackelberg game under two contracting power cases in such a supply chain: the game of supplier, where the component supplier is the game leader, and the game of OEM, where the OEMs are the players that play the first move. We show that small OEM always prefers to control its procurement functions. This is because it would receive a lower price if the component supplier were able to determine the price that discriminate the OEMs. By contrast, the bigger OEM’s preference depends on the power of contracting. Under the supplier game, the bigger OEM never prefers procure directly, while under the OEM game it may have incentives to use direct procurement under some conditions. This implies that if the market power shifts from the supplier to the OEMs, more OEMs turn from delegation towards direct control.